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Change of plans but are we there yet?

Thursday, August 7th 2008, 3:39PM 9 Comments

by Philip Macalister

So we have yet another change of plans for regulating the financial adviser sector. As we reported yesterday the latest recommendations from the select committee have a couple of key features. The first being a return to the concept of tiered regulation, that is one level for simple products like term deposits, and the other for complex ones. The other key change is that a Commissioner for Financial Advisers be established to work within the Securities Commission. On first glance these ideas look good. Regulating advisers on a product basis makes sense. That way it is pretty clear what who sits where. I am sure there will be some fascinating outcomes such as how does it impact on a mortgage broker who is selling KiwiSaver? I assume KiwiSaver is a complex product (although it is meant to be simple). A concern I have had previously is that the Securities Commission was being put into a regulatory role over a sector it doesn’t appear to have a lot of in-depth experience about. (This is not a criticism of the commission, rather a reflection of the role it plays.) A Commissioner of Financial Advice is a good idea. The caution is that the terms of reference and description of the role need to be absolutely tight. As one person said: “it should be as wide as a very narrow doorway.” The appointment of this role is absolutely critical to the success of this regime. A couple of other points worth noting are that it appears the “accredited institution” idea is still alive. As long as there is an alternative and these institutions have exactly the same rules and standards of the alternative then the industry can, I suspect, live with this. Judging by the feedback to a previous post on this idea there is still some way to go in explaining the set-up and getting buy-in from advisers who don’t wish to be aligned to a particular institution. As a bit of a footnote to this whole saga it has been fascinating to see how things have unfolded. In particular the role the Minister of Commerce, Lianne Dalziel, has played. She has been willing to listen to ideas and get it right. While the process has been long it appears to be reaching a conclusion which is workable. Secondly, she has repeatedly said she wants the changes to happen before the election. A week ago I would have said little chance. Now, it is looking far more likely. Finally Dalziel gets credit for openly acknowledging that the former idea of having APBs was the wrong idea. What is perhaps most interesting, is that the former IFA president has gone on record saying that he always believed the APB model wouldn’t work. As the minister has said: why didn’t he tell her that?
« We've seen it all before...but it still hurtsWow. A minister with passion! »

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Comments from our readers

On 8 August 2008 at 9:26 am Mike C said:
So the authorities are flip flopping again about regulation – why are we not surprised?

I would suggest that at this time as a profession we should be greatly worried by just who is making these regulations and so, very much, should the general public. We have a complete fiasco going on just now within the political arena:

• We have a minister who may or may not have taken funds in an inappropriate way
• We have a finance minister who just happened to give away nearly all of a healthy surplus in an election year – how appropriate…..not!
• We have the opposition saying they may need to sell state assets to fund their plans – and a Government [who blew the surplus] trying to lay claim to the high ground
• We have a minister looking at regulating financial services having previously been involved with NZ’s immigration policy – not perhaps the very best training.

Does the Financial Services need regulation – yes as a profession we should have a structure which provides the public with confidence that they are indeed working with professionals and ones who work to a code of ethics which will offer a level of protection to the public in the event of loss due to negligence but which will also offer protection to Advisers against inappropriate and unsustainable claims made by the public.

Let’s face it EVERY profession has its bad apples – every single one and unfortunately no amount of regulation will actually stop that – a bad apple will still operate!

My view is that we should have an industry wide set of ethics and a code of practice – the very best people to create those are us the professionals through our respective professional bodies and which should have oversight from either a Government department or the Securities Commission. Any disciplinary panels or complaints panels should be staffed by both industry and non-industry people [lawyers, accountants etc] and with a chairmanship from the Securities Commission.

The most important thing in my eyes is to keep it simple as the more complex it becomes the less effective it will become and the more expensive it will become for the public!
On 8 August 2008 at 9:27 am James said:
The proposed arrangements look very similar to the Australian Regulatory Regime

Tier 1 - Complex Financial Products
Tier 2 - Simple 'over the counter' banking and insurance products

Certified Finance Institutions look like they have to satisfy the same requirements Australian Financial Services Licence Holders have to go through.
On 8 August 2008 at 9:30 am Andy Phillipson said:
I am tired of this “new legislation”.

After nearly 6 years on the table, we are no further ahead in securing any sort of regulation. But let’s go back to the beginning - the very beginning, and the core reason for introducing regulation.


We are continuously hearing that the New Zealand broker and finance industry is one of the least regulated in the world, and many other countries may even label us “Cowboys”. Can anybody tell me why one of the MOST regulated countries, the good ole’ US of A, still has MAJOR financial institutions failing, and hundreds of thousands of investors losing millions of dollars?

On a more local note – we have the Securities Act, the Consumer Goods Act, the Financial Transactions Reporting Act, to name a few, and yet investors in New Zealand are STILL losing money. Slightly off the track, but still very relevant – the Anti-Smacking Law that cost millions HAS NOT REDUCED CHILD ABUSE OR DEATHS! You cannot blame advisors for an investment company’s failure to perform!

What I am saying is that the harder that bureaucracy legislates to protect the stupid, the more problems and inefficiencies it causes.

Don’t get me wrong: I can see many benefits in cleaning out the cowboys in our industry. The benefits extend to clients and advisers alike.

However, I see far more appropriate and more effective methods. Make the product providers more accountable for the advisers they employ or contract with. The companies should be responsible for the training and development of new advisers, and if the adviser’s behavior becomes questionable, then they accept the responsibility. The companies could even go as far as to pay 50% of the Public Indemnity Insurance cover. This way, product providers will be very careful about who they take on as an “Accredited Adviser”. Of course this won’t completely stop all the cowboys, but then neither will any other form of legislation, no matter how intense it is.

Unfortunately, I cannot see many product providers agreeing to this – they don’t really care who brings in the business – as long as the business comes in. Any disputes can be quickly hidden behind policy wording or bad advice from the adviser. I believe the only reason that insurance companies are so much in favour of regulation is that it will increase the annual premiums! Of course advisers will also benefit from that. But I ask the question again: WILL THE CONSUMER ACTUALLY BENEFIT in any way from MORE regulation? Clearly, the Securities Act, the Disclosure Act, and the Anti-Smacking Laws haven’t achieved total protection.

On a more personal note – I am a mortgage broker. People come to me seeking assistance and guidance in housing finance. As part of my compliance process, I also do a full risk assessment, and advise accordingly. I do the same for the limited investment advice I do. Am I now supposed to do a full financial “needs analysis” that incorporates an entire investment and retirement plan, as well as portfolio management?

Where are we expected to draw the line when it comes to financial advice? My core business is mortgage broking and risk protection. Will I (and others in a similar niche) be expected to retrain in the art of Financial and Investment Planning?

To compare it to the building industry:
• You hire a builder to do the building
• You hire an electrician to do the electrical
• You hire a plumber to do the plumbing and so on.
No one tradesman can do everything efficiently.
To oversee the whole project, you have project managers who monitor progress and quality – they are accountable. Then you have building inspectors who do spot checks to ensure compliance with local by-laws.

It seems to me that the proposed regulation of Financial Advisors is seeking to have a body at government level trying to monitor individual advisers. Seeing this as a major undertaking, the obvious answer to the bureaucrats is to create a whole lot of unrealistic and impractical processes that will (mark my words) become more hassle for the consumers while bringing no better protection than what is already in place.

The best example of this is the much ridiculed Disclosure Document. Yes, I have one, but it is so long winded and comprehensive (it has to be comprehensive to cover the Mortgage advice, the Risk recommendations, the Investment Advice, and the budgeting advice I give, all free of charge) - that probably only 1% of my clients have actually read it. And to be honest, I don’t believe there is ANYTHING in it that would change a persons mind about whether or not they do business with me. However, it does use a lot of extra paper and ink, and wastes a lot of time. In addition, to be able to read it and understand it fully in one reason you would need to be a lawyer. Some of my clients (and I mean this with the greatest respect) can hardly read. But they are still good clients.

My accountant has never shown me his disclosure document, or any of my lawyers or solicitors, nor the car salesmen I have dealt with, or any of my bank managers or IRD managers. Neither has the man behind the counter at the T.A.B! All of these people are just as capable of removing money from me in an illegal or immoral way.

On that note – I have seen more people lose money from corrupt lawyers and accountants than financial advisers over the last 10 years. If we advisers are to be regulated, I believe many other professions should also be investigated.

To be totally frank – may of the product providers are their own worst enemy. All commissions should be the same, and products sold on their relevance to the people we recommend them to. Commission should not be an influence on carrier choice. It should also be paid in such a way so as to prevent churning. This will add further protection to clients. A good solution for this would be REDUCE up front commissions, and spread the commission – bigger trails. If this was legislated instead, we would see the cowboys leave the industry very quickly, and the consumer getting the service they deserve and pay for!

In summary, I don’t believe further regulation is required. I believe the product providers should provide comprehensive accreditation and monitoring of all advisers in the same way Banks train and monitor their staff. In this way, a client will have recourse against the adviser, and the product provider. If the adviser screws up – he (she) will loose their accreditation, or get further corrective training. A national register will keep track of training and accreditation of advisers, as will a compulsory affiliation with a professional body (PAA, NZMBA, IFA, etc.).

I have held off my views as long as I could, because in the past I have seen the bureaucrats keep marching on, ignoring those at the coal-face, and losing sight of the objectives, in the pursuit of more Legislation for the sake of legislation.

It is about time common sense took over, and we kept the real consumers in focus all the way through the process. I am talking about the mums and dads and businessmen who keep this country going.

Maybe there is a better forum that these points could be discussed.

Maybe I am looking at things to simplistically.

Maybe I shouldn’t be a broker because I care about the people who provide me with my income.

I welcome any comments, and maybe we could start a discussion. It may not be too late to have our say – going on the track record so far, we still have another 2 years before any bill gets even close to being passed…..
On 8 August 2008 at 12:51 pm Gary Taylor - Napier said:
Bravo to Andy Phillipson on his article. What he has suggested is so simple that it would work. Perhaps someone would be kind enough to drop his article under the nose of Lianne Dalziel and she could read it, adopt it and say it was her idea, who cares, as long as it's used and makes life easier for advisers, protection for consumers and more accountability both on the adviser and product provider if a problem should arise.
Gary Taylor
On 8 August 2008 at 1:50 pm Nigel Tate CFPcm CLU said:

I support a lot of what Andy Phillipson has to say above with a few minor exceptions.

Andy, if you are giving mortgage advice along with risk management advice as well as "some" investment advice then I believe you should be able and required to show competence in all of these areas. This is closer to comprehensive advice than simple mortgage structuring, a little bit of plumbing can be as dangerous as a lot.

I also have a problem with the product providers having too much control over the advisers dealing directly with the members of the public as this is more than likely leading toward product bias that is not needed. I do like the idea and have promoted this in the past, that all companies should be required to pay a set standard amount of commissions/brokerages for any new business placed and it seems that this amount should be around 20% - 25% per annum flat. NO MORE CHURN!!!

With regard to Andy's comments around the process of formulating legislation in New Zealand, I couldn't agree with him more fervently, the government is reaction to the recent finance company slides in a knee jerking manner and are in my view loosing sight of the real issues and their own objectives - to protect the investing public in a way that promotes the use of and growth of financial assets.

I feel the Government is being sidetracked on many of these real issues and we are ending up with what amounts to paralysis by analysis.

I came into this profession some 21 years ago and was told at the time to "keep it simple stupid" and feel that that advice is as appropriate now as it was then, are you listening Lianne??

With the swift timing of the Select Committee reply I feel we may be very close to the Bill being enacted most likely rushed through before the election and I wonder whether we as affected individuals and corporates should not be canvassing our local MP's in an attempt to have it held over rather than allowing this hastily constructed Bill to be passed in it's current form.

On 8 August 2008 at 2:25 pm Simon Hassan (former IFA president) said:
I should clarify that among other things in that article ("Commission the big bugbear for money advice", SST, 13 Jul 08) the report that I'd "always believed the APB model wouldn’t work" was just wrong.

Most who took an interest in financial adviser regulation will know that I was a keen advocate of the APB idea - and closely involved with MED and the other professional bodies in trying to make it work.

But I never agreed (and made this clear to the Minister) with the MED idea that multiple APB's could compete over advisers in the same space. It seemed that pretty well everyone but MED could see that this wouldn't work. APBs are about standards; how can competing on standards help consumers? But MED wouldn't budge.

In the end I was relieved when the idea – tethered as it was to this major flaw – was scrapped. And there were other attractions in the change - notably a significant shortening of the time frame, and (potentially anyway) a simpler and cheaper regulatory system.

I have no doubt that the G4 (now FAANZ) would have succeeded in creating a pan APB. But even this body would cover only a minority of financial advisers. I understand that FAANZ's combined practitioner membership is only about 1750, in a population of something like 6000 insurance, savings and/or investment advisers.

Simon Hassan (Past President, IFA)
On 8 August 2008 at 5:17 pm Dave Thomas said:
Gee, I think Andy needs to take a deep breath!

Having been in the industry for only eight years it is very clear to me that the vested interests of many entrenched Advisers (and Providers) will always get in the way of any Voluntary Code being established that will be enforced with vigour.

So you might now have to work harder to earn your large commissions - BIG DEAL - sounds like the Consumer might get some value after all.

All Strength to the Securities Commission and Lianne Dalziel.

Dave Thomas
On 8 August 2008 at 6:17 pm Tony Vidler said:
I love seeing and hearing people who have clearly considered the industry issues voicing considered opinion. Congratulations one and all.

Might I suggest that strongly held views on what is appropriate in the regulatory reform be directed, via the submissions process, to the people formulating policy?

To be frank, the only thing that will influence politicians is weight of opinion, and soundly constructed arguments that place the consumers interests at the forefront.

The original objective, supposedly, of regulation was to promote confidence in the financial advisory industry, increase participation in the use of financial products by consumers, and ensue a sound and robust system existed to protect or remedy wrong-doing.

These are still worthy objectives, but I fear that the legislators have lost sight of the original objectives.

You folk can remind them of those objectives, and show them ways of achieving them, as well as the "leaders" of the industry associations can.

Tony Vidler
Financial Adviser Association of New Zealand (FAANZ)
On 11 August 2008 at 11:58 pm Mike Shaw said:
Adviser regulation should address what is important to investors such as;
- good information
- understand risk
- reasonable returns
- sound advice
- regulated capital markets

However at this stage I have doubts the tiered regulations will assist advisers to do the things they should to meet investors expectations such as;
- understand products they recommend
- explain the risks
- disclose commissions and rewards
- understand the client needs
- advise in the clients interest
- understand the legal framework
Commenting is closed



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